Caterpillar sees 3Q profit jump 49%, but demand slows

Mining equipment is on display Monday at the Caterpillar booth at the MINExpo International 2012 trade show in Las Vegas. (Steve Marcus/Las Vegas Sun)

Caterpillar Inc. on Monday said its third-quarter profit was up 49 percent, but it cut its full-year earnings outlook as it prepares for lower sales through the beginning of 2013.

Caterpillar said it now expects 2012 earnings of $66 billion with profit between $9 to $9.25 per share. The company had expected earnings between $68 billion to $70 billion and profit of about $9.60 per share.

The Peoria-based heavy-equipment maker said user demand is not growing as fast as it had expected worldwide, which has left dealers with too much inventory. The extra inventory is worth about $2 billion. To burn through it, dealers have cut order rates.

Caterpillar reacted by temporarily shutting down plants and laying-off workers to reduce production levels. Those measures are expected to continue through the first quarter of next year.

The company cites economic uncertainty around the world due in part by the U.S. presidential election in November, which has businesses in a wait-and-see mode, Europe's economic crisis and slow growth in developing countries.

As it looks into the next year, Caterpillar said it expects earnings to be the same as this year, plus or minus 5 percent, with improvement in the United States, China and most of developing world, but with continuing difficulty in Europe.

Mike DeWalt, Caterpillar director of investor relations, said in a conference call that the company is not seeing or expecting a global recession, but it is also not expecting any improvement in growth until the second half of 2013.

Specifically, DeWalt said the company is expecting lower sales of mining equipment, due to lower metal and coal prices and increasing operating costs. Caterpillar expects to offset them with higher sales in construction equipment in the U.S., China and Brazil. On the downside, DeWalt said the company is not expecting economic recovery in Europe and is planning for lower sales of equipment there.

"Now, to be clear, we're not expecting China to make up the ground that was lost in 2012, but we do expect some modest improvement from the very disappointing 2012," DeWalt said.

Still, Doug Oberhelman, Caterpillar's chairman and chief executive, said the company is encouraged by an increase of building permits in China and the announcement of a major infrastructure project.

In the U.S., uncertainty is keeping growth levels lower than they should be and affecting businesses long-term plans, said Chief Financial Officer Ed Rapp. At the core of his concerns are higher taxes, the impact of the Affordable Care Act and the country's deficit.

In the international arena, Rapp said there is a serious concern about protectionist policies that would affect trade. "Out view is that if you are a struggling competitor around the world, you would adjust to compete and win," he said. "Putting down barriers is a tremendous risk to global growth."

Adolfo Laurenti, deputy chief economist at Mesirow Financial, said companies that rely on exports are seeing a lot pressure because the rest of the world is not doing well. The economies of emerging nations, such as China, Brazil and India are tied to the economies of Europe and the United States.

The outlook for next year, he predicts, is better than in 2012, but not great and a little bit disappointing. "It's not what we had hoped for a year ago," Laurenti said.

The European Union is trying to clean up after years of accumulating debt by reducing government benefits and restructuring their private and banking sectors, Laurenti said. Meanwhile, the U.S. is dealing with a deficit of $1.1 trillion. The hole is so big, Laurenti said, that regardless of who wins the election, taxpayers will be hit with an tax increase and the government will have to cut spending.

On the positive side, Laurenti said that the economies of Brazil and China are growing, albeit slowly, despite their ties to Europe and the U.S.

"It used to be that when the U.S. sneezes, the rest of the world would catch pneumonia," Laurenti said. Now, he said, when the U.S. sneezes, the rest of the world catches a cold. "I wonder if that's less and less true, and 2013 will be a crucial test of whether those economies are economically resilient on their own."

Caterpillar posted a third-quarter profit of $1.70 billion, or $2.54 per share, up from $1.14 billion, or $1.71 per share, a year ago. Revenues rose 5 percent, to $16.45 billion.

The third-quarter profit was aided by higher prices and U.S. sales. It also included a pre-tax gain of $273 million from the sale of a logistics business in which Caterpillar had a majority interest.